Introduction The purpose of this paper is to analyze each of the following forms of business: sole proprietorship, general partnership, Limited Liability Partnership (LLP), Limited Liability Company (LLC), S-Corporation, franchise, and C-Corporation and develop a justifiable scenario of the preferred form of business. Business Forms The sole proprietorship is the simplest form of business. The owner of the business is called the sole proprietor and is the business.
The sole proprietorship, while being easy to form and maintain, has one major disadvantage; the owner is legally and personally responsible for the business’s obligations the owner or any employee agree to during the course of employment. A sole proprietor bears the risk of loss of the business. In addition, the sole proprietor has unlimited personal liability. A General Partnership is a voluntary association of two or more persons for carrying on a business as co-owners for profit (Cheeseman, 2010). The rights and duties of a general partnership are normally established in a written partnership agreement however, it is not required by law.
General partners are personally liable for the debts and obligations of the partnership (Cheeseman, 2010) and like the sole proprietor, have unlimited personal liability. The income or losses of the partnership pass through to the individual partners personal income tax returns; the partnership itself does not pay federal income taxes. A Limited Liability Company (LLC) is an unincorporated business entity that combines the most favorable attributes of general partnerships, and corporations (Cheeseman, 2010).
An LLC may elect to be taxed as a partnership, the owners can manage the business, and the owners have limited liability for debts and obligations of the partnership. Income or losses flow through to the members’ individual income tax return thus avoiding double taxation. Limited Liability Partnerships (LLP) are very similar to LLCs but are limited to certain types of professionals such as accountants, lawyers, and doctors. In an LLP, all partners are limited partners who stand to lose only their capital contribution if the partnership fails.
None of the partners is personally liable for the debts and obligations of the partnership beyond his or her capital contribution (Cheeseman, 2010). Corporations are the most dominant form of business organization in the United States (Cheeseman, 2010). Legally, a corporation has the same rights as any individual and can sue or be sued. Corporations, as an entity, are liable for their own debts and obligations; not their corporate officers. Shareholders have limited liability and are only liable to the extent of their capital contributions and do not have personal liability for the corporation.
Legally, a corporation must be governed by a board of directors. The board makes the policy decision regarding the strategic vision of the corporation. The members of the board of directors are elected by the shareholders who, in turn, appoint corporate officers to run the corporation’s day-to-day operations. Together, the board of directors and the corporate officers form the corporate management (Cheeseman, 2010). An S-Corporation is nothing more than a standard corporation that meets certain Internal Revenue Service (IRS) requirements.
The most important criteria are the company cannot have more than 100 shareholders. The S-Corporation election with the IRS enables the income profit or losses to be reported on member’s individual tax returns instead of corporate tax returns; thus reducing the overall taxable rate. Franchise is literally an agreement or license between two parties, the franchisee and the franchisor, for the use of an already established trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services (Cheeseman, 2010).
The franchisee is a separate business entity than the franchisor. Scenarios and Justification The preferred form of business for a sole proprietorship is any main street type business; a general store, a clothing shop, a small, one location restaurant. These types of businesses are generally family owned and do business locally. They do not need additional capital for expansion and the risk of litigation is low. The positive to this business form is low administrative maintenance and straight forward tax status.
The negative is unlimited personal liability and the potential to pay extra in taxes due to self-employment tax. The preferred from of business for a general partnership would be any father-son type business, trade businesses where the partners bring different but complimenting skill sets to the table, or temporary type business where two parties get together for a one-time job. General partnerships are essentially two sole proprietors who have joined forces.
The positive to this business form is low administrative maintenance and straight forward tax status; profits flow to the partner’s individual tax return. The negative is unlimited personal liability and the potential to pay extra in taxes due to self-employment tax. The preferred form of business for an LLC is any type of business where the protection from unlimited personal liability is desired but with the ease of tax rules as in a sole proprietorship. It is often more flexible than a corporation, and it is well-suited for companies with a single owner.
The positive attributes of this form of business are low initial startup cost, very simple maintain administratively, pass-through tax status and the owner(s) have limited personal liability. The negative aspect is the owner(s) will have to pay higher taxes due to self-employment taxes. An LLP is essentially a special LLC. The LLP is limited to professional companies like doctors and lawyers. An LLP shares characteristics of a general partnership; where all members have equal rights and powers and of a corporation with limited personal liability.
LLPs are administrative low maintenance and income or losses pass through to partner’s individual tax returns. A standard corporation is typical of the largest companies in America; i. e. Lockheed Martin Corporation. The primary difference in this form of business over others is the owners of the company. The corporation form of business is necessary for companies like Lockheed Martin Corporation in order to raise capital. The capital is raised by selling shares in the company thus the shareholders become the owners of the company.
Corporations can be simple or quite complex depending on the needs of the company. Corporations typically have full-time employees dedicated to maintaining the administrative burdens of this form of business and the Initial Public Offering (IPO) of the corporation can be very complex. Regardless of the size of a corporation, the same paperwork is required to be filed with the state of incorporation and the federal government. Since a corporation is it’s on individual, the corporation’s profits or losses are reported to the IRS separately.
Advantages of this form of business are limited personal liability for shareholders (owners) and employees, and ease of raising new capital for expansion. The disadvantages are a high corporate tax rate and complexity of the administrative requirements. An S type Corporation is very similar to an LLC. While the LLC is unincorporated, the S-Corporation is a full corporation with all the legal protections of a standard corporation. An S-Corporation is ideal for a one person company or a company having less than 100 shareholders.
The advantages of an S-Corporation are limited personal liability for the shareholders, and a reduction is taxes since with an S-Corporation the profits and losses are reported on individual tax returns, double taxation is avoided. Additionally, owners with S-Corporation status with the IRS do not have to pay self-employment taxes thereby further reducing the tax burden. Conclusion There are many different circumstances which would cause entrepreneurs to choose specific form of business. There are advantages and disadvantages to each form of business. Entrepreneurs must be able to see into the future and predict what their needs will be.
Based on this strategic vision, and the consultation of a good tax attorney, they will be able to determine which business form is the best for their specific situation. Objectively, the S-Corporation provides the best of all worlds; protection from personal liability, avoidance of double taxation, and ability to raise capital by selling stock. References Cheeseman, H. R. (2010). Business law: legal environment, online commerce, business ethics, and international issues (7th ed. ). Retrieved from https://ecampus. phoenix. edu/content/eBookLibrary2/content/eReader. aspx.